A settlement agreement can bring an employment relationship to an end on agreed terms, but signing one is a big decision. Once the agreement becomes legally binding, you will usually give up the right to bring certain employment claims against your employer in return for an agreed financial package and other terms.
At Dumonts Solicitors, our experienced employment lawyers advise employees on settlement agreements, explain what the proposed terms mean in practice and help negotiate improvements where appropriate. Before you sign, it is important to understand exactly what you are agreeing to and whether the proposed package properly protects your interests.
What Is a Settlement Agreement?
A settlement agreement is a legally binding agreement between an employer and an employee. It is commonly used when employment is ending, although agreements can also be reached while employment continues.
Employers may propose settlement agreements in situations involving redundancy, workplace disputes, performance or capability concerns, grievances, disciplinary matters or a mutually agreed departure. The agreement will normally set out the payments you will receive and the claims you agree not to pursue.
For a settlement agreement to validly waive statutory employment claims, specific legal requirements must be satisfied, including the requirement for the employee to receive advice from an appropriate independent adviser.
Do You Have to Sign a Settlement Agreement?
No. An employer cannot normally force you to accept a settlement agreement simply because it has been offered.
Never allow yourself to be pressured into signing before you understand the consequences. The amount initially offered is not necessarily the amount you ultimately have to accept, and there may be scope to negotiate the financial package or other important provisions.
If you refuse an offer, your employment may continue or your employer may decide to follow another process, such as redundancy, capability or disciplinary procedures. What happens will depend on the circumstances, which is why obtaining legal advice before responding can be invaluable.
The Importance of Getting Independent Legal Advice
Receiving independent legal advice is an essential part of entering into a legally effective settlement agreement that waives statutory employment rights.
Your solicitor should explain the effect of the agreement, identify the employment claims being waived and highlight provisions that may create difficulties later. At Dumonts Solicitors, we also consider whether the proposed financial terms appear appropriate in the context of your employment, the circumstances surrounding your departure and any potential claims.
Employers will often contribute towards an employee’s legal costs for obtaining settlement agreement advice, although the amount offered varies.
Understanding Your Settlement Package
The headline compensation figure is only one part of the agreement. Your solicitor should check how the agreement deals with notice pay, accrued holiday pay, salary, bonuses, commission, benefits and other contractual entitlements.
Notice pay is particularly important. Depending on the arrangement, you might work your notice, be placed on garden leave or receive a payment in lieu of notice. Accrued but untaken holiday may also need to be paid when employment ends.
Compensation for the termination of employment should be clearly distinguished from contractual payments. Tax treatment can differ between types of payment. Certain qualifying termination payments may potentially benefit from tax-free treatment up to the statutory threshold, while salary, holiday pay and payments relating to notice are generally subject to normal deductions.
The precise tax position depends on the structure of the payment and the applicable rules, so the wording should be checked carefully before signing.
References, Confidentiality and Restrictive Covenants
A settlement agreement can affect your career long after you receive the settlement payment.
Where possible, it can be sensible to agree the wording of an employment reference as part of the settlement. This provides greater certainty when you apply for future positions.
Many agreements also contain confidentiality provisions covering the settlement itself, confidential business information or statements made about the employer. These clauses need careful consideration because confidentiality obligations are not necessarily unlimited and should not unlawfully prevent protected disclosures or other communications that the law permits.
You should also pay close attention to any restrictive covenants. Restrictions concerning competitors, clients, employees or confidential information could affect where and how you work next. Existing restrictions may sometimes be repeated, amended or reaffirmed within a settlement agreement.
Can You Negotiate a Settlement Agreement?
Yes. Settlement agreements are agreements, which means their terms can potentially be negotiated.
Negotiations are not limited to compensation. Depending on the circumstances, you may wish to discuss your termination date, notice arrangements, bonus or commission payments, benefits, references, announcements about your departure, confidentiality provisions and restrictive covenants.
Effective negotiation requires more than simply requesting a larger payment. Your solicitor can assess the circumstances surrounding your employment and departure, identify potential legal claims or commercial considerations and use those factors to support negotiations where appropriate.
Speak to Dumonts Solicitors Before You Sign
If you are an employee who has been offered a settlement agreement, it is important to obtain legal advice before signing.
We are a highly experienced team of solicitors based in London’s West End, providing practical and commercially focused employment law advice.
We take a proactive approach and apply decades of commercial experience to finding intelligent solutions to complex problems. Every employment situation is different, so our advice is tailored to what matters to you. We are also transparent about costs and offer a range of fee structures depending on the circumstances of each case.
Call Dumonts Solicitors today to speak to our employment law team.
Phone: 0204 534 8873
Email: info@dumonts-solicitors.com
